Foreign Currency Report 05 September 2008

Sterling

Sterling stayed firm yesterday from record lows against the Euro and US Dollar after the Bank of England left interest rates unchanged at 5.00 percent, as markets expected, but this respite is expected to be short-lived. In fact part of the reason that it stayed within a fairly tight range was because analysts attributed a positive reaction to the rate verdict due to speculation of a surprise 25 basis point cut.

The decline in sterling, starting last year is now turning into something of a rout and I will try to explain why! The UK is exposed in three main ways to the aftermath of the credit squeeze. Firstly it has heavily overvalued housing, secondly the most indebted consumers in the world and lastly an economy that is overly reliant on financial services. High borrowing costs, a painful housing market correction and losses in the financial sector mean most of the UK's assets have been dramatically devalued and Sterling has suffered accordingly!

Against the Euro it has lost over 16 per cent of its value since last summer and versus the US dollar, 13 per cent. This week has been especially punishing as after a string of falls, the pound is now trading at levels closer to what we saw during the aftermath of Black Wednesday. A far cry from the highs of last summer. A recent downbeat medium-term assessment from Alistair Darling, (chancellor of the exchequer), some poor economic predictions and weak domestic data has led to a 2.5 per cent fall against the dollar since Friday afternoon alone and it is likely to continue.

A recent feeble package to bolster the housing market, has left the impression that something needs to be done whist delivering very little. If it has had any effect, it has reduced confidence in the pound. The slide of sterling is therefore necessary and perhaps should be not quite as much of a shock as first thought. The Monetary policy committee don't seem to be that pro-active though in their responses of late, preferring instead to sit on its hands which we saw again yesterday, a very British way of doing things but we will keep that stiff upper lip wont we!!

Dollar

There wasn't much data out yesterday to move the dollar but it did lose ground initially in early trading yesterday after the Federal Reserve's latest Beige Book reading of economic conditions showed the pace of economic activity remained slow and companies are still pulling back on hiring. The dollar did however resume normal play and pick up a bit later in the day following better than expected factory orders data. A recent sharp decline in oil prices has helped ramp up the dollar allowing it to enjoy a recovery of late which has seen it gain 10 per cent versus the pound in just a month.

The dollar has also gained lately following grim data from Europe and whilst crude prices have steadily declined. The latest data also indicates expectations of further growth for the US economy. The market's main focus will now be on the release of key U.S. non-farm payrolls data for August, which should give further clues on U.S. economic health. If any one piece of data drives the markets and gives it direction for the short term then this is it so watch this space as we may see this rollercoaster ride go a bit further yet!

Euro

The euro fell yesterday to its lowest level in almost four weeks versus the dollar after the European Central Bank President Jean Claude Trichet said the region is undergoing an ``episode of weak activity,'' signaling policy makers aren't inclined to lift interest rates soon. He should have learnt from Alistair Darlings faux pas really but less said about that the better. The European single currency dropped for a sixth day as Trichet said downside risks to growth prevail. The ECB kept its main rate at a seven-year high of 4.25 percent yesterday and the central bank cut its own economic growth projection for 2008 and 2009, according to staff forecasts. Trichet ``sounded a touch more dovish than many in the market expected, and that triggered some sell-offs,'' said Neil Jones the head of European hedge-fund sales at Mizuho Capital Markets in London. ``People in the market expected a tough stance on inflation, but his emphasis on downside risks on the economy might have surprised some investors.''

Don't be too surprised by this move though its probably not going to do anything to change the picture for all you Euro purchasers. I would like to give you good news (honest) but that may have to wait for now.

In fact I often hear clients telling me that it will turn around at some point but I have yet to speak to anybody that can back up this claim with hard facts. The facts all direct towards a further decline and unfortunately I feel it is more a case of hoping the market will rebound as each individual sees their property purchase abroad either become increasingly expensive or a distant dream altogether. Looking at the history of the pound however over a longer period of time it is clear to see that it was overvalued last year and a correction was inevitable. Moving away from economic growth based primarily on consumer and business spending at home to an equilibrium that en¬courages more exports is a necessary correction. Any investor worrying about this new weakness should appreciate that on a real trade-weighted basis, the pound is now at its historic average. Looking forward we rely heavily on imports and as we see reserves in the North Sea fields dwindle and the UK starts to increase its imports of oil and gas, sterling is likely to fall further. To protect yourself against the anticipated market movement we have a number of options to help you including a buy now pay later solution (No its not like that cheap sofa company that charge you interest) it is a genuine market tool that will save you money so please..... help me help you!!!

Contact jrs@fcexchange.co.uk or call 0207 989 0000 and speak to James Smerdon